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When Solyndra filed for bankruptcy last summer, the solar-panel manufacturer left U.S. taxpayers on the hook for a loan of $535 million that the government had guaranteed (and even subordinated to fresh private credit as the company's troubles worsened). In retrospect, it's clear that the motive behind the loan guarantee was basically political: to foster green energy regardless of its economic merit.

That's always the problem with government investment: Politicians make political decisions, not economic ones. Thus history is littered with government investment disasters. The Clinch River Breeder Reactor, authorized in 1970, was estimated to cost $699 million.

The project ran through $8 billion before, unbuilt, it was canceled in 1983. The Wilson administration thought that it could produce armor plate for battleships cheaper than the steel companies. The plant, millions over budget when completed, could not produce armor plate for less than twice what the steel companies charged.

Even at the dawn of the industrial age, governments were making investment decisions for political reasons, with unhappy financial results.

CONSIDER THE ERIE RAILWAY. In order to get political support for building the Erie Canal, Gov. De Witt Clinton, promised the New York counties that bordered Pennsylvania (known as the "Southern Tier") an "avenue" of their own, once the Erie Canal was completed. The canal was an enormous success, putting the "empire" in the Empire State.

The Erie Railway faced engineering challenges on its mountainous route. It overcame them with solutions such as the Starrucca Viaduct, finished in 1848 and still in service. Its political challenges were no less daunting.
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But being such a success, the canal quickly and deeply affected the state's politics. The "Canal Ring," a group of politicians from along its pathway, soon dominated state government. They were not keen on helping to build what would necessarily be competition for the canal.

Direct competition with the Erie Canal was not an issue; building a canal through the mountainous terrain of the Southern Tier was impossible. So at first it was thought that the promised "avenue" would be a toll road. But by the 1830s, railroads had become the hot new transportation technology.

Only with the utmost effort did Southern Tier politicians induce the Legislature to grant a charter for a railroad to run from the Hudson River to Lake Erie through their counties. And the charter almost guaranteed economic failure. The road, for instance, was required to run wholly within New York State. As a result, it could not have its eastern terminus in New Jersey, opposite New York City. It had to end instead in the small town of Piermont, N.Y., twenty miles to the north.

It was also forbidden to run to booming Buffalo, where the Erie Canal entered Lake Erie. It had to terminate instead in Dunkirk, a small town on the shore of Lake Erie a few miles south of Buffalo. Thus, what was projected to be the longest railroad in the world was to run 483 miles between two towns of no importance whatever and through sparsely settled lands in between. It's a fine precedent for the currently proposed California high-speed rail project, the first segment of which would run only between Fresno and Bakersfield.

The Erie Railway charter permitted capital of $10 million to be raised, but required that the company could not formally organize until it had raised $500,000.

Of course, since it was hoped that the money would be raised from people along the route, there would be few willing investors until the route had been surveyed. And the route couldn't be surveyed until there was money to pay for it. After another political struggle in Albany, the charter was amended to allow incorporation after raising only $100,000.

It was initially estimated, with remarkable precision, that it would take $4,726,260 and five years to build the road. As with countless government-inspired projects since, the estimates proved wildly low. It would take $23.5 million and 17 years to complete the Erie.

With the depression that began in 1837, it soon became clear that only massive state aid would see the project through. So New York State, initiating the still-common practice of sending good money after bad, agreed to put up $200,000 for every $100,000 raised through stock sales.

EVEN THAT WAS NOT ENOUGH, however, and the railroad issued a blizzard of first mortgage bonds, second mortgage bonds, convertible bonds and subordinated debentures to raise the needed money. There was even one issue of bonds that could be converted into stock and converted back to convertible bonds as often as the bondholder wished. That, of course, was speculator heaven, and the Erie would become "the scarlet woman of Wall Street" as a result.

This mountain of debt finally got the Erie completed in 1851, but debt would haunt the road throughout its corporate existence, driving it into bankruptcy again and again. Indeed, the Erie Railway would pass through bankruptcy no fewer than six times before it disappeared as a corporate entity in the early 1970s.

JOHN STEELE GORDON is an author of business books, most recently, An Empire of Wealth: The Epic History of American Economic Power.